What is the Cost of Filing a Consumer Proposal or a Bankruptcy

This is one of the most common questions Licensed Insolvency Trustees (LIT) get asked and in most cases, it is usually answered by giving a response about fees. If it were only that simple.

The cost of filing for bankruptcy is something you will need to consider when you are considering claiming bankruptcy or filing a consumer proposal. How much it will cost to do either a consumer proposal or a bankruptcy depends on several factors. During your initial consultation with the LIT, they are going to provide an assessment of the following:

your monthly income;

the size of the family unit and whether you are providing support for others outside the family home;

your spouse’s income and income of other members of the family unit;

what assets you own; whether you have been bankrupt before; and,

other intangible factors.

These factors come into play when determining what it will cost to file.

The Minimum Fee

In cases where whatever assets you own are exempt (protected) the LIT will get paid a minimum fee for its services. Fees are set by the Office of the Superintendent of Bankruptcy. The minimum fee for first time bankrupts is about $1,700 (it varies slightly from province to province). You will have to contribute to your bankruptcy estate each month to cover various filing fees and other administrative costs. The minimum period for a bankruptcy is nine months, so you will be making these payments for at least a nine-month period. This is the minimum fee for filing for bankruptcy.

Surplus income

You are required to pay part of your surplus income into your estate each month. If you and your family earn over a certain amount each month, you pay part of your earnings over that limit. The surplus income calculation for the cost of filing for bankruptcy is reasonably complicated, so we suggest you bring your recent pay stubs to your meeting with the LIT so that they can estimate the amount of surplus income payments you will make while bankrupt. If you have surplus income, your bankruptcy will be extended for an extra year. For example, if your monthly payment calculated pursuant to the Income Standards is $200 then your total cost would be $4,200 (21 months x $200). The fees of the LIT would be paid from this amount.

Non-exempt assets

Each province and territory in Canada sets out what you are allowed to keep in a bankruptcy or proposal and varies from province to province. If you have non-exempt assets the LIT is obligated to realize upon them. For example, in BC RESPs are not exempt. If you have an RESP then a portion of that would need to be paid to the LIT.

Tax refunds

You will lose any tax refunds and GST credits you would otherwise receive during the bankruptcy period. GST credits are refundable back to you if the Trustee receives its minimum fee from other sources.

Windfalls

Finally, you will lose any windfalls you receive or become entitled to during the bankruptcy period. For example, if you inherit money while bankrupt, or win the lottery, that money must be surrendered to the LIT.

The minimum bankruptcy period in Canada is nine months, but if you have surplus income, or if you were before bankrupt, your bankruptcy will last longer before you are able to apply for your discharge from bankruptcy.

The fees of the LIT

Other than the minimum fee, the fees of the LIT are paid out of asset realization or surplus income payments. Similarly, the fees of the LIT in a consumer proposal are paid out of the monthly payments. The fees of the LIT in both cases are set out in the rules of the Bankruptcy and Insolvency Act and are set by the Office of the Superintendent of Bankruptcy. The LIT does not set the fee.

So now you know what it will cost to go bankrupt. The LIT will then determine an approximate return to your creditors in the bankruptcy. If you file a consumer proposal, the return to creditors must be greater. It must be greater as you want your creditors to accept it and it must be sufficiently more than what they would receive in a bankruptcy to provide the creditor incentive to vote in favor. So, if your creditors are going to receive 10% in a bankruptcy, an 11% return in a proposal is not likely enough of a spread to have them vote in favor.

What should you do when you can’t pay your debt.

During your initial interview with the LIT, they will consider all of the above factors (save lottery winnings) to advise you what it would costs and then make an assessment whether a consumer proposal or a bankruptcy is a better option. The amount you will pay while bankrupt will depend on your monthly take home pay, your family size, and your assets. Given this information, you may first wish to attempt to avoid bankruptcy by looking at one of the bankruptcy alternatives.

If you would like to know exact details of how much a consumer proposal or a bankruptcy would cost, call us at (604) 605-3335 to schedule a free consultation.